Saturday, December 13, 2008

Labor costs and the Big Three, part 1

The debate over the UAW's role in the plight of the Big Three automakers and its responsibility for the cratering of the bailout deal has been rather tendentious. Let's start with the oft-cited statistic that the hourly labor costs of the big three are north of $70/hr while that of the name-brand Japanese manufacturers operating in the US are a bit over $40/hr.

The number seems indisputably correct but there is a disagreement over just what it means and how significant it is.

One argument belabors the obvious but does correct what may be a common mispprehension. To say that labor costs are $ 70/hr is not to say that the average Big Three worker receives this in cash compensation. UAW defenders point out that the average base wage of an assembler is actually around $28/hr. Nice money but much less than $ 70/hr.

Of course, if we stop there, we understate cash compensation. The UAW contracts contain a complicated patchwork of provisions for overtime, premium pay, compensation during layoffs, etc. It turns out that the cash compensation of current UAW workers is around $40/hr per hour worked. Since, to use Chrysler/Daimler as an example, the average hourly employee worked 35.5. hours per week in 2006, actual cash compensation would be a little under $ 74,000. For production line work, that's a ton.

But cash compensation is not all there is. The UAW has negotiated very nice health care and pension packages. Do they make up the remaining $ 30-some/hr?

No, say the critics of the number. They claim that it includes the cost of paying benefits to current retirees and at least one GM spokesperson is quoted as saying that it does.

But this seems to be contradicted by company documents. James Sherk at the Heritage Foundation goes over the companies' SEC filings and concludes it does not. What it includes, he says, is amounts set aside to pay the promised retiree benefits of the current workers -something that currently applicable accounting standards require. Benefits paid out to current retirees are another matter,he says, costing the companies roughly another $30/hr per hour worked by current workers. In other words, according to Sherk, if you include legacy costs, the labor burden per current hour worked actually exceeds $100/hr.

I can't say who is right, but Sherk's claim sounds closer to the truth. If Chrysler/Daimler, to use one example, is paying and accruing, as he reports, $20/hr per current hour worked for the current and future health care costs of current workers, it seems unlikely that the pension obligations to current workers and the rather substantial benefits enjoyed by 84,000 retired workers and their families could be accounted for by a little over $10 per current hour worked.

Either way, the UAW contracts are still pretty rich. But what difference does it make? For ease of reading and in accord with blog etiquette, let's address that in a second post.


Brew City Brawler said...

When I can't say who is right on something, I usually turn to a Hillsdale College-educated ideologue who's paid to attack organized labor. Specifically I turn to one who in June published a piece titled "A Good Job is Not So Hard to Find," in July published "Getting Better All the Time: Improving Job Quality in the United States" and in August published "Increasing Job Security in the Work Force," which closed with this observation:

"Many Americans are understandably worried about their job security during this current economic downturn. It has become conventional wisdom that Americans have less job security today than a generation ago and that globalization and corporate greed have put the jobs of even the most diligent workers at risk.

"But like so much of conventional wisdom, this view is simply wrong. Job security does rise and fall with the business cycle, but American workers are significantly less likely to find themselves involuntarily or unexpectedly unemployed than a generation ago. The economy is going through difficult times, but workers have much less to worry about than 30 years ago."

In the think tank trade, maybe.

James Sherker

Rick Esenberg said...

When I can't say who is right on something, I usually turn to a Hillsdale College-educated ideologue who's paid to attack organized labor.

Well, I don't. I look at his sources he cites and the numbers and see if his argument makes sense.

The other thing I don't do is dismiss what he says because he's on the wrong side.

As for the other articles, I'd have to address them on their own merits. Notwithstanding our experience during the past two months, they may not be wrong as descriptions of the past 30 years.

Dad29 said...


No matter the substantiation, a Hillsdale prof MUST BE WRONG.

Conversely, no matter the substantiation, a MATC prof MUST BE RIGHT.

What don't you understand, Rick?

John Foust said...

Yes, Dad29, it's a complete coincidence that Esenberg went to the Heritage Foundation to find the answer. He wanted to look high and low, but once he found what he was looking for, he stopped. No preconceptions around here! Follow the logic: That's the scientific method. Sifting and winnowing, they call it!

Rick Esenberg said...

Actually, I went to the sources that Sherk used. I also went to Media Matters and the sources Jay relies on to see if they establish what they claim. The $ 800/vehicle (at least without the legacy costs) seems about right. The idea that legacy costs are included in the $75/hr seems less clear to me.

Brew City Brawler said...

I don't automatically dismiss arguments from the "other side" if you mean conservatives. I agreed with much of your BOA/Republic post for instance. But if the arguments are coming from an organization whose express purpose is to provide arguments to right-wing pols -- and if it sneers at the concept of being some kind of Ph.D. committee giving equal time -- than I confess my policy is distrust unless it's verified.

That description of the Heritage Foundation is cribbed from Burton Pines, circa 1986, and the attitude is as true today as it was then:

"We're not here to be some kind of Ph.D. committee giving equal time," says Burton Pines, a vice-president of Heritage. "Our role is to provide conservative public-policy makers with arguments to bolster our side. We're not troubled over this. There are plenty of think tanks on the other side." (From Gregg Easterbrook's old Atlantic article, Ideas Move Nations.)

(Of course, Heritage is far more to the right than, say,Brookings is on the left, but that's a different matter.)

Sherk may be right. But the UAW has disputed the B3 characterizations of cost/hour for some time. .

My question is what would be the impact of the VEBAs created under the 2007 contract on the $70/hour (assuming, you know, the BigThree survive and honor their commitments to said voluntary employee beneficiary associations).The VEBAs would enable the B3 to shed tens of billions in health care obligations.

Dad: If one person were to have spent the past three years listening to Heritage Foundation "experts" discuss what was happening in the economy and another listened to left economists (Krugman, DeLong, Bernstein, Baker), who would have a better idea of what was happening with employement trends, the housing bubble or the state of the economy?

Anonymous said...